By Elsa Henriksson (Stockholm School of Economics), Hassan Sharif and Vinay Naik (University of Warwick)
Overview of the deal
Acquirer: Just Eat Takeaway
Estimated Enterprise Value: $7.3B
Announcement Date: 10.06.2020
Target Advisors: Evercore, Centerview Partners
Acquirer Advisors: Goldman Sachs, Bank of America
Just Eat Takeaway (JET), the European online food delivery company, has agreed to acquire 100% of the shares of its US rival, Grubhub, for $7.3B. Grubhub shareholders were offered 0.671 ordinary shares in JET for each Grubhub share they own in this all-stock acquisition. This follows talks over a potential merger between Uber and Grubhub that failed following scrutiny by the competitive authorities.
Not only are these 2 firms believed to be a good cultural fit, they are also two of the few firms within the industry that have had a consistently positive EBITDA. Although JET is said to be prioritising sustainable growth over profits at least in the short run, which has been the key driver for much of its success in Europe.
The acquisition will lead to the creation of the world’s largest food delivery company outside of China, connecting various restaurant partners across 25 countries. It will allow JET to enter the competitive US market and build on its merger earlier this year with Netherlands based Takeaway. This had followed a stream of strategic acquisitions JET had partaken in since it was founded in 2001, which includes SkipTheDishes, a strong player within the Canadian food delivery market. Thus, by spreading its roots in North America, JET can gain from significant synergies through the strengthening of both its Canadian and now North American businesses.
The combined group is now one of the only profitable players in the space and processed approximately 593 million orders in 2019 with more than 70 million combined active customers globally.
"Matt (CEO of Grubhub) and I are the two remaining food delivery veterans in the sector, having started our respective businesses at the turn of the century, albeit on two different continents. - Jitse Groen, CEO and founder of Just Eat Takeaway.com
Company Details: Just Eat Takeaway
Just Eat Takeaway is a leading online food delivery company founded in 2001 and headquartered in London. Its use of proprietary technology allows it to offer a quick and efficient service to over 26 million customers across the Americas, Europe and the Middle East.
Founded in: 2001
Headquartered in: London, United Kingdom
CEO: Jitse Groen
Number of employees: 3,600
Market Cap: $7.23B (as of 09/04/2020)
LTM Revenue: $1.09B
LTM EBITDA: $146.38M
LTM EV/Revenue: 6.81x
LTM EV/EBITDA: 50.69x
Company Details: Grubhub
Grubhub Inc, headquartered in Chicago, United States, is a leading online and mobile platform for delivery and restaurant pick-ups. With over 22.62 million active customers in 2019 and partnerships with more than 300,000 restaurants across the United States, Grubhub has developed a strong foundation in the US.
Founded in: 2004
Headquartered in: Chicago, IL, United States
CEO: Matt Maloney
Number of employees: 2,773
Market Cap: $6.37B (as of 27/06/2020)
LTM Revenue: $1.35B
LTM EBITDA: $61.6M
LTM EV/Revenue: 4.85x
LTM EV/EBITDA: 104.57x
Post-acquisition, both companies are set to stay independent operating in different geographies. This lack of geographical overlap between the two firms means that the marketing efficiencies gained from consolidation are likely limited in the short run. Furthermore, the high-level of competition in the US food industry could be a possible hurdle to overcome. The US market is known to be highly competitive, normally requiring very high spending to gain and retain customers. This could explain the 13% fall in JET’s stock price following confirmation of talks between the two companies. Although, the Covid-19 pandemic is causing an upsurge in profit margins due to higher demand for food delivery. Thus, having a positive effect for JET, at least in the short run. At the same time, it would be important to note that JET has placed a greater emphasis on the long run, where higher margins arrive as a result of consolidation, even if profits are subdued in the short run.
The food delivery market is growing at a rapid pace, and is expected to more than double in terms of gross revenue by 2025. Grubhub is currently the largest player in North America, accounting for over a one-third share of the market, and JET has over 83% share of the U.K. market. The food delivery market is regarded as one where the winner-takes-all meaning that the largest player will have superior returns to competitors and will be difficult to outcompete. The strategic synergies by combining Grubhub’s US operations with JET’s Canadian SkipTheDishes, the network effects, as well as the growth in the selection of restaurants and thus also customer base clearly illustrates the benefits of the deal for JET.
This transaction results in a company built around four of the world’s largest profit pools in food delivery: the U.S., the U.K., the Netherlands and Germany. These markets show substantial further opportunities for growth, significant penetration upside and long-term profitability improvements. Looking ahead, the enhanced scale and leading positions of the Combined Group provide an opportunity to leverage investments, particular in technology, marketing and restaurant delivery services and create the broadest possible offering to both restaurant partners and consumers.
Risks and Uncertainties
One of the most pressing risks surrounding a merger of this size is the failure to obtain the necessary approval from both shareholders and regulators. Shareholders have shown an initial distaste towards the transaction, most likely due to the amount of investment required by Grubhub to maintain its number-one position in the US food delivery market. American investors are looking for the food delivery market to consolidate from its four leading players in the near future, however it has been projected by Aaron Kessler of Raymond James Equity Research that this transaction between JET and Grubhub ‘will do little to fundamentally reshape the landscape’ of the market. On a slightly more reassuring note, European JET’s lack of a US presence until now means US regulators are unlikely to have any qualms with the merger proceeding, as the transaction is unlikely to cause a reduction in competition in the American market. Similarly, the same can be said for American Grubhub and European regulators. The collapse of Uber’s original deal to acquire Grubhub due to US antitrust concerns was precisely the reason JET was able to step in and seize the opportunity.
The COVID-19 pandemic is undoubtedly a large risk for any transaction going forward. With Florida and Texas delaying lockdown lifting measures in the US, and a gradual easing of restrictions across Europe, revenues and costs may fluctuate and impact the performance of the merged company. However, Grubhub has claimed to see ‘significantly improved trends’ in the second quarter of 2020 in comparison to the first quarter, due to an increased volume of diners and restaurant partners alike taking advantage of delivery services to counteract dine-in restrictions imposed across the US. This is a positive and encouraging sign, however it is not known for sure yet how the pandemic will affect operations and liquidity in the longer term.
“Combining the companies that started it all will mean that two trailblazing start-ups have become a clear global leader,” - Matt Maloney, CEO of Grubhub Inc